Cash Usage Down, Gold Correspondingly Up?

In February, the World Gold Council released the newest edition of Gold Investor. What can we learn from the report? Let’s discuss gold’s role in the onslaught of the cashless society, its role as a portfolio diversifier, reverse asset and source of liquidity.

Rogoff Wants Cashless Society, but Appreciates Gold

As a lot has happened recently, we didn’t have time to analyze the latest Gold Investor edition. Let’s do it today, starting with the cover article about Rogoff’s call for cashless society!

Cash is in decline. According to the report, in the US, the share of all legal transactions by value conducted in cash decreased from 35 percent at the turn of the century to just 7 percent today. And it is expected to fall to around 2 percent in the next decade. For some economists this is a positive trend, as in the cashless society there would be less crime, while monetary policy would be more effective. For example, Ken Rogoff, a famous American economist, argues in the cover article that “being able to introduce effective negative interest rates is very important, at certain times. And it would be much easier to do so in a cashless economy.”

Sounds scary, doesn’t it? Apparently the zero interest rates policy was not enough, so technocrats are ready to support the abolition of cash because it would facilitate the introduction of negative interest rates. At least Rogoff appreciates gold’s unique role as a monetary asset. He also correctly notes that the move towards cashless society, and interest rates below zero, could increase the appeal of gold as a store of wealth:

As we have less and less paper currency, there will still be a need to store wealth, to have privacy and to carry out transactions between parties who don’t trust one another – gold fills that role. It’s probably the best substitute for paper currency so it’s hard to imagine its transaction value won’t go up over time.

Moreover, Rogoff notes that gold is a portfolio diversifier. He believes that emerging market central banks should increase their gold reserves by several percentage points, amid shrinking share of the US in the global economy and rising federal debt. Individuals also can use gold as a safe haven in difficult times, such as high inflation or negative interest rates implemented to get out of debt trap:

As a hedge, gold has enormous value. You never know what’s going to happen and when something really bad happens, gold is probably going to be worth a lot to you. So it makes sense for high net worth individuals and perhaps even for some pension funds to hold a small percentage of their assets in gold.

Gold’s Perspective on the Decade after Lehman Brothers’ Bankruptcy

There are a few other interesting article in the February’s Gold Investor. For example, in an article about central banks’ purchases of gold, EzechielCopicnotes that central banks are among the world’s largest investors in gold, with total holdings of more than 30,000 tons. And that they are increasing their gold reserves still further, while many central banks (Poland, Hungary or India) returning to the market after multi-year absence.

Loy Cheow Chew writes about another potentially important player in the gold market: the sovereign wealth funds. He argues that they should allocate higher percentage of their holdings to gold, as the shiny metal “can provide a potential hedge against calamity, today or in the future. After all, (…) a currency is just an IOU. Gold is a permanent asset.”

And there is even a piece about gold’s role in a low-carbon economy. The author’s conclusion is that gold’s overall carbon footprint is relatively small, which constitutes another argument for adding gold to the portfolio.

However, what we found very insightful was the article about the gold’s perspective on 10 years after the bankruptcy of Lehman Brothers. The author reminds, as we also repeatedly do, that gold fell in the fourth quarter of 2008, as the dollar strengthened and gold was used as a source of liquidity. The reason is that in crisis cash is king – investors’ first instinct is to sell assets and accumulate US dollars.

However, as soon as in the first quarter of 2009, gold was comfortably above its pre-crisis level and ready to rally further. Although the price of gold started to decline in 2013, the lasting legacy of the Great Recession was that the yellow metal has become a more mainstream asset. Glad to hear that!